U.S. banks hit by low interest rates, weak trading

(Reuters) - U.S. banks are cutting costs to boost earnings as interest rates remain stuck near historic lows and fixed-income trading, long a source of revenue growth, shows no sign of picking up.

A sign outside the headquarters of JP Morgan Chase & Co in New York, September 19, 2013. REUTERS/Mike Segar

Of the three big U.S. banks that have reported quarterly results so far, only Wells Fargo & Co (WFC.N), the biggest mortgage lender, managed a rise in revenue and income from interests on loans - and that thanks mostly to its strategy of leveraging its hefty balance sheet to buy loans.

JPMorgan Chase & Co (JPM.N) and Bank of America Inc (BAC.N) reported a fall on both measures as low interest rates squeeze the spread between banks’ cost of funds and the interest earned from loans and securities.

Normally, turbulence would be good for trading. But unusually high volatility during the third quarter, exacerbated by uncertainty about the timing of the first U.S. interest rate hike since 2006, discouraged investors from making big bets.

The U.S. Federal Reserve held off on a rise that many had expected in mid-September, citing worries about global growth, jittery markets and muted inflation.

The first few weeks of the new quarter offered little sign of a pickup in trading, prompting JPMorgan Chief Financial Officer Marianne Lake to say that analyst estimates for the current quarter appeared to be too high.

Bank of America, the No. 2 U.S. bank by assets, reported on Wednesday that three of its four main businesses reported a drop in revenue. Only consumer banking managed a rise - of 1 percent.

JPMorgan, the biggest U.S. bank, reported on Tuesday a 6.4 percent drop in revenue with only its consumer banking business of its four main profit centers showing a rise in profit.

The bank posted a 22 percent rise in net income, but this was mainly due to a tax benefit and lower costs related to employee pay.

Cost cuts paid off especially for BofA. The Charlotte, North Carolina-based bank reported a profit, compared with a year-earlier loss, thanks largely to a 31 percent drop on non-interest expenses.

Under CEO Brian Moynihan, BofA - which paid more than $70 billion in legal settlements since 2008 - has been slashing billions of dollars in costs in its commercial lending, investment banking and wealth management businesses as it seeks to put the worst of the financial crisis behind it.

The problems for banks don’t end with the U.S. banks.

Germany’s Deutsche Bank (DBKGn.DE) reported a record pre-tax loss of $6.9 billion in the quarter and warned investors of a possible dividend cut.